Morning Commentary: Riding the Blue Wave to Vaccine Stimulus
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Riding the Blue Wave to Vaccine Stimulus
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Andrew Kositkun Foreign Exchange Head Trader
2020 may be in the rearview mirror, but its effects are still being felt on the economy. On the data front, the ADP private sector jobs report disappointed markets, as the markets lost 123,000 jobs against expectations for a growth of 75,000 jobs. Labor market focus now shifts to this Friday’s nonfarm payroll report that is expected to confirm a sputtering labor market recovery. Market consensus is for the unemployment rate to rise to 6.8% from 6.7% and job creation to decelerate to 73,000 jobs created from 245,000 jobs created in November. This significant slowdown in job creation is especially concerning, as the economy has only recovered roughly 56% of the 21 million jobs that were lost during the pandemic.
On the virus front, the seven-day average of COVID-19 cases in the U.S. has dropped 7% from its peak on Dec. 18, but this drop in cases coincides with a drop in testing around the holidays. Since the weekend, the number of cases has surged and should continue to trend upward as testing increases, the impact of superspreader holiday events plays out and the more contagious U.K. strain of the virus spreads.
On the vaccination front, reports suggest inoculations are moving slower in the U.S. relative to other countries. At the current rate, herd immunity is not projected to occur until at least mid-2022. Thankfully the speed of vaccinations is expected to increase significantly in the coming months as states become more efficient with logistics (similar to testing) and more vaccine options become available. Notably, the U.K. recently approved the AstraZeneca vaccine that can be stored at less cold temperatures than the Pfizer/BioNTech and Moderna vaccines. U.S. approval for AstraZeneca’s vaccine candidate should be coming soon; however, initial hiccups in vaccine distribution suggests that it will be a few months before enough vulnerable people are vaccinated to enable broad economic re-engagement.
One thing that will help is the recently passed fiscal stimulus bill that should provide a boost to the economy before vaccine stimulus is able to kick in. This bill includes substantial help for consumers, small businesses and some of the hardest-hit sectors of the economy, although the bill does not provide any direct support for state and local governments. Of course the big event this week is the two Senate runoff elections in Georgia.
As of this writing, several media outlets have declared Raphael Warnock (D) the winner over Kelly Loeffler (R) in one of the races, with the other race between David Perdue (R) and Jon Ossoff (D) going down to the wire. It should be noted that neither Republican candidate has conceded, and risks remain for legal challenges after the final results are announced. Given this, blue-wave trades are picking up steam, as illustrated by the U.S. 10-year yield moving above 1% for the first time since March 2020 in anticipation of another round of stimulus. Additionally, tech stocks have taken a hit on risks of higher regulation.
Assuming Democrats win both seats, the chances of additional stimulus should be higher than under a divided government, but the more progressive legislative items are still unlikely due to the presence of moderate Democrats and a wafer-thin Democratic majority. The area where Democratic control should make a difference is control of the Senate agenda. Should Democrats gain control of this role, items such as a large infrastructure bill become more likely.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
The NYSE has reversed course once again and will not proceeding with its plan to delist three major Chinese telecom companies. This is the second about-face this week.
The OPEC+ impasse was broken by Saudi Arabia, as the country agreed to absorb the burden of output cuts through a surprise unilateral production cut of 1 million barrels a day in February and March. This will allow for slight increases by Kazakhstan and Russia. Overall, the result of the meeting and expectations for U.S. stimulus should provide near-term support for energy prices.
Moderna’s vaccine candidate has received approval from EU drug regulators.
Eurozone final services and composite PMIs fell modestly, with final services and composite PMIs in Asia mixed.
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